Valentine's Day - the Hangover

By: Erik Swarts | Mon, Jan 16, 2012
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The thing about divergences....

...is, there should be enough information in the divergence itself to make an educated decision as to which one will maintain trend and which one will break. The divergence is the first clue that something's not quite right. Like a romance that grows distant over time, one of the respective parties likely knows enough about the other to determine if the relationship can be restored - or if it is in fact broken. Markets, just like women - need your complete attention. It's imperative to know as much about the respective relationship, so that you will have the emotional aptitude to determine its course. It inevitably becomes complicated, less we be reminded of the overused - although timeless, relationship and market wisdom from the Dr. Phil of his time - Mr. John Maynard Keynes,

"Markets (and people) can remain irrational far longer than you or I can remain solvent (or sane)."

RSI Chart - SPX vs TNX
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When thinking about the equity markets here and their divergence from the rest of the pack (currency, commodity and credit markets), I have a hard time seeing the impetus for what will be required to have the "Three C's" come eye to eye with the equity markets perspective. Over short timeframes, stocks tend to be the most insensitive asset class to their surroundings. Going on a bender while the other parties prepare for a wake is certainly within their psychological profile. I am speaking through my own biases of course, but if I was a bull, I would feel more comfortable if the market had traded in concert with a declining euro or a strengthening Treasury market and was loaded with heartbroken sentiment for the next pivot. Markets can jump with great elasticity if the bus is crowded to one side. My point being, even if the euro decides to bounce like any dead cat can - the amount of reflex in equities will likely be muted because the sentiment picture has become so exuberant.

Below is a fractal study of 10 year Treasury yields that compares its past year trajectory with the SPX from the 2008/2009 timeframe. As apparent in the chart, both markets have corrected with very similar structures, proportions and momentum signatures.

RSI Chart - 2008/9 SPX vs 2011/12 TNX
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If the fractal proves prescient for TNX, and considering that in the past Treasury yields have typically bottomed before the equity markets - the relationship between Treasuries and equities will be restored by Valentine's Day - with what could only be considered a very painful hangover for stocks.

As always, stay frosty - just emotionally available...

 


 

Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

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